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Public Spending on Transportation and Water Infrastructure

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November 17, 2010

The nations transportation and water infrastructureits highways, airports, water supply systems, wastewater treatment plants, and other facilitiesplays a vital role in the economy. Private commercial activities and the daily lives of individuals depend on that physical infrastructure, which is provided by all levels of government in the United States. In fiscal year 2007the most recent year for which data on combined spending by the federal government and by state and local governments are availabletotal public spending for transportation and water infrastructure was $356 billion, or 2.4 percent of the nations economic output.

Concerns about the nations infrastructure have prompted calls for greater spending. The Congress is considering the funding level for the next several years for federal infrastructure programs, such as highways, mass transit, and aviation. In response to a request from the Senate Finance Committee, CBO prepared a study that analyzes recent developments in spending on transportation and water infrastructure, trends in spending for capital and for operations and maintenance, and the rationale for public spending on infrastructure. This study updates a previous report CBO published in August 2007, Trends in Public Spending on Transportation and Water Infrastructure, 1956 to 2004.

Recent Developments in Public Spending for Transportation and Water Infrastructure

Between 2003 and 2007, real (inflation-adjusted) public spending on transportation and water infrastructure declined by $23 billion, or 6 percent. That decline, which reflects a decrease in real capital spending, especially by the federal government, stands in contrast to the fairly steady increase in spending for such infrastructure during the previous two decades. The drop was primarily the result of a sharp increase in prices for materials used to build such infrastructurean increase that outpaced the growth of nominal (current-dollar) spending on water and transportation infrastructure.

In 2009, the federal government spent $87 billion on transportation and water infrastructure, $6 billion more than it spent in 2007. Of those outlays, about $4 billion was made available through the American Recovery and Reinvestment Act of 2009 (ARRA). In total, lawmakers appropriated $62 billion for transportation and water infrastructure under that legislation. CBO expects that, in nominal terms, federal spending for transportation and water infrastructure under ARRA will total $54 billion through 2013, by which time almost 90 percent of the funds made available for infrastructure through ARRA will have been spent.

The Composition of Public Spending for Transportation and Water Infrastructure

State and local governments account for about 75 percent of total public spending on transportation and water infrastructureexcluding the share of their spending financed by grants and loan subsidies provided by the federal governmentand the federal government accounts for the other 25 percent. That split has remained roughly constant for several decades.

In recent years, not quite half of total public funding for transportation and water infrastructure in the United States has been devoted to capital spending for activities such as construction and equipment purchases. State and local governments have accounted for about 60 percent of those capital expenditures, and the federal government has accounted for 40 percent.

A little more than half of total public spending for such infrastructure has been used for operation and maintenance, of which state and local governments have provided about 90 percent. Although the federal government has played a limited role in such funding overall, it has provided much of the resources for operating and maintaining the nations air traffic control system.

Spending on highways at all levels of government accounted for 43 percent of expenditures for transportation and water infrastructure in 2007. Expenditures on water supply and wastewater treatment systems accounted for 28 percent of spending; aviation, mass transit and rail made up 23 percent; and the remaining categories of water transportation and water resources accounted for 5 percent.

The Role of Government in Funding Transportation and Water Infrastructure

In the United States, the public sector rather than the private sector typically provides funding for transportation and water infrastructure. Whether it is more efficient for the federal government to provide that funding depends on the type of infrastructure and the likelihood that such infrastructure will be undersupplied if its provision is left to state and local governments or to the private sector.

Evidence suggests that spending for carefully selected infrastructure projects can contribute to long-term economic growth by increasing the nations capital stock and raising productivity. Realizing the potential gains depends crucially on identifying projects with benefits to society that will outweigh their costs, but identifying such projects is difficult. The federal government could make its current funding more effective by ensuring that the costs of infrastructure projects are borne by different levels of government on the basis of where the benefits are expected to accrue.

This study was prepared by Nathan Musick of CBOs Microeconomic Studies Division.